that cultural differences between the Israelis and the Palestinians were the reason the Israelis were so much more economically successful than the Palestinians. He also vastly understated the income disparities between the two groups.

In his speech, Mr. Romney mentioned two books that had influenced his thinking about nations — “Guns, Germs and Steel,” by Jared Diamond, and “The Wealth and Poverty of Nations,” by David S. Landes. Mr. Diamond’s book, Mr. Romney said, argues that the physical characteristics of the land account for the success of the people living there, while Mr. Landes’s book, he continued, argues that culture is the defining factor.

“Culture makes all the difference,” Mr. Romney said. “And as I come here and I look out over this city and consider the accomplishments of the people of this nation, I recognize the power of at least culture and a few other things.”

[H]is campaign said that the Associated Press had “grossly mischaracterized” the remarks by not providing the full context. For instance, the campaign said, after mentioning the per capita G.D.P. of Israel and Palestine, Mr. Romney also said: “And that is also between other countries that are near or next to each other. Chile and Ecuador, Mexico and the United States.”

The Acemoglu and Robinson book begins with Nogales AZ (USA) vs Nogales Mexico and puts institutions at the center of an explanation of income disparities not culture or geography.

I’m not sure if AR would actually help on this specific subject. Romney might want to read some reports by the AiX Group, http://www.aixgroup.org/, a group of Israeli and Palestinian economists who have written reports about the way in which the occupation of the West Bank and Gaza limits economic development, mostly for the Palestinians.

[…] thoughts on Romney. Acemoglu wrote back from vacation in Turkey, pointing me to an item on the Cheap Talk blog Monday that’s kind of similar to this one. (It recommends that Romney read Why Nations […]

Both this blog and the related Business Week blog are in all reality splitting hairs on the definition of culture to try to score political points. One could also get into chicken and egg argument over whether institutions are the product of culture or vice versa. Unfortunately, putting government institutions ahead of the people who are responsible for creating them or responsible for letting others (such as a theocracy or dictatorship) create for them is the same backwards thinking presented in Obama’s “you didn’t build that” speech in full context. Who does he thinks paid for all of the infrastructure other than taxpayers? Power and culture are ultimately the responsibility of the people who create them or allow themselves to be subject to them. Those who establish institutions and culture that allow themselves to thrive are those that do. If we allow people like Obama to control this country, we will no longer thrive.

Paul, you don’t seem to understand that you’re making Obama’s point. Individual business owners did not pay for our infrastructure, on which they rely heavily. The government, financed by taxpayers, did. Thus, they did not do it on their own. We all helped them. That’s ultimately why we pay taxes.

Don’t institutions come from culture? How are institutions a product of anything other than culture?

Acemoglu: “Israel is so much richer than other countries in the area because it was founded by people with high human capital bringing in technology from Europe, and has been integrated into the world economy, continuing the process of technology transfer throughout the last several decades.”

[…] and Palestinian and Mexican and US economic outcomes differ because of cultural differences. This immediately brought to mind the recent book by Daron and Jim, “Why Nations Fail” because they begin by comparing […]

I don’t think it’s all that much more ridiculous than Acemoglu using tropical disease as a proxy for institutions, assuming away any other effect such diseases may have. His paper didn’t even mention nations like Ethiopia, Thailand or (to a lesser extent) Liberia which might provide some exogenous variation in colonial history.

Romney was comparing Israel with all the Arab states, not just Palestine, and he was uncontestably, undeniably correct (excluding Dubai). I don’t think he needs to read more on what creates wealth in a nation, but the present (short-term one hopes) occupant of the White House could certainly benefit from some remedial reading of economics 101 and the literature which links prosperity to the rule of law.

Robert, your implied point that the government infrastructure somehow was the differentiating factor in the entrepreneur being luckier than someone else ignores the fact that the infrastructure was generally available. While out jogging under a highway bridge, I was recently attacked by a pit bull owned by a homeless person high on methadone that tax payers also funded. One person uses the bridge to reach customers with an innovative model that they pursue 14 hours a day. Another person uses the bridge as shelter for self-destructive behavior and, in my case, to harm others. That’s why the difference in outcomes. That both cultural and institutional.

Agree with Dion. The Soviet Union had plenty of infrastructure spending, but the economy collapsed due to socialism strangling entrepreneurship. And Robert is simply wrong when he says “Individual business owners did not pay for our infrastructure, on which they rely heavily. The government, financed by taxpayers, did. Thus, they did not do it on their own.” The government can’t pay for anything on its own, only by collecting taxes from the private sector. And don’t say taxpayers in general paid, when 1/2 of all Americans don’t pay income tax. So who paid for the infrastructure? High income Americans, profitable private businesses, and corporations. So the real truth is exactly the opposite of what Robert wrote, individual business owners paid disproportionately for our infrastructure, and therefore have every right to benefit heavily from it.

but the economy collapsed due to socialism strangling entrepreneurship.

Rubbish.The USSR collapsed as a result of imperial military misadventure in Afghanistan and being out spent in the ‘defence’ arms race. A strong mixed economy was a contributing factor allowing the US government to out spend – a lever if you will – but was not the trigger for collapse.

If the government can simply pay with fiat currency, fiscal deficit, and monetary inflation, how could the USSR collapse through overspending? Is there perhaps some other element, like productivity and real wealth?

GW, your argument is what doesn’t bear serious scrutiny here. Fiat currency is no protection from economic collapse, just ask Zimbabwe or the Weimar Republic. The reason the Soviet Union and Zimbabwe collapsed was socialism, because there is no way any government can allocate resources and capital more efficiently than a free market can. It’s simply impossible. We ran a 45 year test during the Cold War, and the larger, more populous, more resource rich country, the Soviet Union, lost badly. Why? Because socialism by its very nature is uneconomic and wasteful of resources. So yes, free enterprise won…in a rout.

As for the USSR being outspent, yes. the US had more economic surplus to devote to military spending, precisely because its private economy was more productive and efficient. You are confusing the result with the cause.

When you wrote:

“”The government can’t pay for anything on its own, only by collecting taxes from the private sector.”

Clearly you have never heard of fiat currency, fiscal deficit or monetary inflation.”

That money still comes from the private sector. Inflation is a tax on savings and capital, so my point that private industry and the rich still paid for the infrastructure is still 100% valid.

Likewise when you wrote:

“US infrastructure, now falling into decrepitude, was generally paid for in an era of much higher taxation (both corporate and personal) and from a broader base”

still makes my point 100% valid. Tax rates, whatever their level, still raise money disproportionately from corporations, businesses and rich private individuals. Poor people, no matter how numerous, just don’t have the money to pay much income tax. In fact, in your “golden era” of high tax rates on the rich, they have even a better claim to have paid for all the infrastructure, with the poor getting a virtually free benefit.

So please, try to learn some economics from the “Chicago School” instead of repeating the mantras of the Chicago gangster socialists currently running our economy into the ground.

Is there perhaps some other element, like productivity and real wealth?

Absolutely – there are numerous factors. My position was to refute the simplistic and inaccurate claim made by rjd100 wrt taxation being the only mechanism for a state to pay it’s bills.

@rjd100

In response:

Fiat currency is no protection from economic collapse

I haven’t suggested it is, I’m merely attempted to refute your supposition that the government “can’t pay for anything on it’s own, only by collecting taxes from the private sector.” This is false. Simply if this were the case, how would the US’ enormous defecit be explained?

Furthermore, I would suggest that Zimbabwe has collapsed as a result of endemic corruption any cronyism as opposed to socialism per se. If socialism were to cause financial collapse ipso facto then how can you explain on the one hand the success of (socialist) China and alternatively, the chronic insolvency of the (non socialist) US? As an aside note, I have noticed American folk tend to confuse socialism (a very broad term) with communism (something quite specific).

there is no way any government can allocate resources and capital more efficiently than a free market can.

Yet to be proven given there is not a single example in the world of an unfettered free market. The US certainly does not qualify as a free market by any stretch of the imagination.

As for the USSR being outspent, yes. the US had more economic surplus to devote to military spending, precisely because its private economy was more productive and efficient.

There was also the small factor of being completely devastated in two World Wars but I won’t quibble.

Re fiat currency etc. If you accept that the Fed and the US Treasury are private sector systems then yes, capital is ‘created’ by the private sector. However, if you are to take capital as a fungible representation of labour, then it’s sector agnostic, so again, it’s inaccurate to suggest that taxation only has value from the private sector.

Further, inflation is not a tax on savings because no benefit is exacted from that rent to a counterparty. It is a purely monetary phenomenon. In the most extreme sense it could be seen as a “tax” on unproductive capital (in terms of being a passive imposition/erosion) but it is not a tax in the classic sense.

private industry and the rich still paid for the infrastructure is still 100% valid.

One could reasonably argue that Labour paid for it my not receiving the economic surplus for their efforts, so I’m afraid your position is not validated.

This is a myth. As per above money that does not hit peoples pockets cannot be taxed. So the rich will always shoulder the “burden” given that they have the capacity to pay. If the surplus was spread across a broader base, the net tax position would be unlikely to change.

So please, try to learn some economics from the “Chicago School”…
The Chicago School doctrine has adequately demonstrated it worth in the form of stagnating wages, gross income inequality and complete absence of being able to understand externalities beyond the financial, though in fairness, this has largely been as a result of misapplication of theory.

However, given that we live in an imperfect reality based rather than theoretical world, then any “success” is largely chimerical.

As Friedman himself said “One of the great mistakes is to judge policies and programs by their intentions rather than their results.” As with everything, the proof is in the pudding; and the Chicago School doesn’t taste that good to most.

Ah, GW, it never fails. When confronted with facts on the failure of socialism, the socialist always says the theory cannot be tested, or that it would have worked if only the people weren’t corrupt. Of course, this is all rubbish.

First of all, don’t give me the line that there is no free market in existence (or prefect socialism for that matter). One can quite clearly distinguish between the level of free market allowed under any regime. The USA was clearly more free market than the USSR, and we know who one that one. Want closer comparables? East Germany was clearly more socialist than West Germany, and much poorer as a result. North Korea is clearly more socialist than South Korea, and vasty poorer as a result. In the case of the two Germanys and the two Koreas, we are controlling for culture, and war devastation. Socialism was proven a miserable failure.

We can also run the test using the same country, controlling for geography as well as culture. Zimbabwe was wealthier under capitalism than under the socialist Mugabe regime. So was Cuba before Castro. And in reverse, China has become far wealthier since it rejected Maoism and embraced the market oriented reforms of Deng. So in all these cases, societies that embrace the market prosper and those that embrace socialism become trapped in poverty.

Now I’m sure you’ll reply with some blather like your previous post when you wrote: “However, given that we live in an imperfect reality based rather than theoretical world, then any “success” is largely chimerical.” Well, sorry GW, but the only reaons to study economics is to apply it to the real world. And in the real world, free market oriented policies have vastly outperformed socialist ones, using test cases that span decades. Socialism fails because is it contrary to human nature.

GW, your first original word of your first post, “rubbish”, was smug belittling, so please don’t cry that your feelings are getting hurt now that I am wiping the floor with you in the debate. And don’t twist my words either, like you try to when you write:

I did nothing of the sort, and gave you numerous examples of free market superiority: North v South Korea, East and West Germany, Cuba before and after Castro, Zimbabwe before and after Mugabe, China before and after Deng. Either man up and provide a convincing counterexample or concede the point. Your blanket dismissal when you wrote “The ‘Free enterprise wins!’ meme is unqualified economic revisionism and doesn’t bear serious scrutiny.” is the true rubbish fueling this whole debate.

Then you write, “Again you are conflation Socialism with Communism. Socialist policies and institutions have been relatively successful across many democratic countries – France, Norway, Australia, Great Britain, New Zealand – even in the US under the New Deal. It’s important to get terminology right”

Yes it is. So you might want to check out what the third letter in USSR stands for. Socialism is govt ownership of industry. The USSR was more truly socialist in a way Karl Marx would recognize than any of the nations you mention. What socialism has morphed into in your examples is a combination of welfare state and govt control and direction of industry without taking ownership in most cases. That is not true socialism, just intrusive statism (sort of a moderm mercantilism). More Colbert than Marx. But whether we call it socialism or statism, it underperforms free market economics.

Finally you write: “Free market policies (in their modern incarnation) have only been around for a short while so I would suggest that the jury is still out. The same can be said for socialism.”

The free market has been in existence as long as there have been markets, bazaars and free trading of goods. Statist economics, including socialism, has been around as long as we have governments with the power to force people to acts in ways other than the free market would encourage. And the success of the free market and the failures of statism have been there to see for centuries, for those who would open their eyes and look.

“The government can’t pay for anything on its own, only by collecting taxes from the private sector.”

Clearly you have never heard of fiat currency, fiscal deficit or monetary inflation.”

That money still comes from the private sector. A fiscal deficit is funded by borrowing from the private sector. When the debt is repaid, it is repaid by the taxpayers with interest. All borrowing does is move intertemporal consumption from the future into the present. Study a few expectations models and you will see modern economics recognizes this.

Inflation is a tax on savings. The value of savings is lowered by inflation. Part of the value of the savings is confiscated by the govt and spent. That is, as Chief Justice Roberts would say, a tax on the private sector.

Likewise, inflation is a tax on capital. The definition of economic income assumes that your productive capital assets are the same at the end of the period as at the beginning of the period. Therefore depreciation is subtracted from income to allow replacement of capital assets. Under 20% inflation over the live of the capital asset, you would get a depreciation deduction of $100 for a capital asset that cost $100, but to replace the asset you would have to pay $120. The difference of $20 is a confiscation of capital by the govt, a tax on capital.

In the end, the only thing that can fund the govt is the private, productive sector, through taxes. Even if we allow for the govt owning a productive business, as under socialism, this business would be taxed too in order to fund the govt. So in the end, there is no “magic” free govt money, either through inflation of fiat currency or borrowing through fiscal deficit, that does not involve taxing the productive sector for govt use. Sorry GW, there is no govt “magic” free money Santa Claus.

Firstly, I ask you to resist the urge to get into name calling or smug belittling. I am a social-democrat by inclination, not what an American would term a Socialist (which I believe equates to a communist).

First of all, don’t give me the line that there is no free market in existence (or prefect socialism for that matter).

Why not? The ‘line’ is a fact. You even accept that no genuine free market exists therefore your premise “there is no way any government can allocate resources and capital more efficiently than a free market can.” is unprovable. I didn’t make the claim; you did.

One can quite clearly distinguish between the level of free market allowed under any regime. The USA was clearly more free market than the USSR, and we know who one that one.

Sure. I agree that you can simply distinguish between the levels of free market involvement when comparing countries. But your premise was not based on any relativity. As above, it was blanket.

My sole position on this is that to reduce the collapse of the USSR (and your later example of Zimbabwe) to one ideological factor, the power of the free market, is reductive and false.

The USSR’s collapse was a very complex issue of (among other things) nationalism, failed reform, unforeseen results of relaxed political communication controls and poor harvests – as pretty much any empirical, non ideologically biased research will tell you. The political economy setup under the soviet system was only one factor.

Socialism was proven a miserable failure.

Again you are conflation Socialism with Communism. Socialist policies and institutions have been relatively successful across many democratic countries – France, Norway, Australia, Great Britain, New Zealand – even in the US under the New Deal. It’s important to get terminology right.

And in the real world, free market oriented policies have vastly outperformed socialist ones, using test cases that span decades. Socialism fails because is it contrary to human nature.

Free market policies (in their modern incarnation) have only been around for a short while so I would suggest that the jury is still out. The same can be said for socialism.

But I would put to you some simple questions: modern (post 70s) free market policies have performed for well whom? The already wealthy or the average wage earner? Who is reaping the benefits? Who incomes are stagnant or falling?

I would also be wary of claiming anything is against human nature. Until not that long ago, not believing in god was against human nature too!

Inflation is a tax on savings….

We’ll agree to disagree on this one. If the government can’t collect inflation and spend it, it’s not a tax. It’s a cost – a monetary effect rather than a fiscal one.

In your example of $100 for plant / 20% lifetime inflation, you firstly premise that inflation is solely the responsibility of government (it’s not), that the state somehow benefits (it doesn’t) and most importantly, don’t take into account that the product of your plant is also likely to be affected by the same inflationary pressure. Therefore the change is essentially neutral – if you sell your product in the same market, inflation will be built into your receipts. If it didn’t work this way, no companies would ever turn a profit or be able to replace plant without incurring a loss. This is clearly not the case.

Sorry GW, there is no govt “magic” free money Santa Claus.

Agreed, but again your premise was singular; ”The government can’t pay for anything on its own, only by collecting taxes from the private sector.” This remains incorrect. You even go on to give the example of a State Owned Enterprise paying tax.

I will close with with a generally accepted list of fiscal options for government spending that I hope will close this discussion and enlighten you:

GW, your first original word of your first post, “rubbish”, was smug belittling, so please don’t cry that your feelings are getting hurt now that I am wiping the floor with you in the debate. And don’t twist my words either, like you try to when you write:

I did nothing of the sort, and gave you numerous examples of free market superiority: North v South Korea, East and West Germany, Cuba before and after Castro, Zimbabwe before and after Mugabe, China before and after Deng. Either man up and provide a convincing counterexample or concede the point. Your blanket dismissal when you wrote “The ‘Free enterprise wins!’ meme is unqualified economic revisionism and doesn’t bear serious scrutiny.” is the true rubbish fueling this whole debate.

Then you write, “Again you are conflation Socialism with Communism. Socialist policies and institutions have been relatively successful across many democratic countries – France, Norway, Australia, Great Britain, New Zealand – even in the US under the New Deal. It’s important to get terminology right”

Yes it is. So you might want to check out what the third letter in USSR stands for. Socialism is govt ownership of industry. The USSR was more truly socialist in a way Karl Marx would recognize than any of the nations you mention. What socialism has morphed into in your examples is a combination of welfare state and govt control and direction of industry without taking ownership in most cases. That is not true socialism, just intrusive statism (sort of a moderm mercantilism). More Colbert than Marx. But whether we call it socialism or statism, it underperforms free market economics.

Finally you write: “Free market policies (in their modern incarnation) have only been around for a short while so I would suggest that the jury is still out. The same can be said for socialism.”

The free market has been in existence as long as there have been markets, bazaars and free trading of goods. Statist economics, including socialism, has been around as long as we have governments with the power to force people to acts in ways other than the free market would encourage. And the success of the free market and the failures of statism have been there to see for centuries, for those who would open their eyes and look.

Well they are certainly spending it, what do you think they are printing money for? They print the money, and they can undeniably spend it. And I described to you how inflation devalues savings. So if the govt reduces the value of your savings and spends the money, it certainly sounds to any rational person like they are collecting wealth from the private sector and spending it. Likewise if they are reducing the depreciation deduction through inflation so that assets can not be fully replaced without using current income, then they are certainly taxing capital assets. That is why big spending politicians and governments love inflation, it allows them to tax savings and capital without voting on it. Bloated governments have benefited from inflation as far back as the late Roman Empire.

Now to enlighten you on the meaning of the “fiscal options” you listed:

(a) Taxation – taking resources from the private sector for the govt to spend

(b) Borrowing (internal or abroad) – intertemporal shifting of consumption that is borrowed from the private sector and must be repaid through taxation of the private sector

(c) Consumption of fiscal reserves – fiscal reserves do not exist unless created through taxation

(d) Sale of fixed assets (privatisation) – The question here is how the govt got the assets in the first place. If the govt bought a business, then it used taxes to buy it, so selling it is just freeing up tax dollars for other uses. The only significant exception is land, and this is a finite resource. (And how does a govt lay claim to land? By taxing the citizenry to pay for a military to occupy it). Moreover, no govt has been able to solely fund itself with land sales for any extended period of time, this is usually a very small part of any govt’s long-term spending, virtually nil for modern statist regimes. Really a red herring.

(e) Seigniorage (printing money) – as already explained, inflation is a form of taxation.

So my premise that “The government can’t pay for anything on its own, only by collecting taxes from the private sector” stands affirmed.

Sorry GW, there is no “magic” free money Santa Claus to pay for govt expenditures, it comes from the taxpayers in the wealth creating private sector.

My 9:15 am August 14 post for some reason did not show GW’s comment to which I responded. The secton whould read:

………And don’t twist my words either, like you try to when you write:

“You even accept that no genuine free market exists therefore your premise “there is no way any government can allocate resources and capital more efficiently than a free market can.” is unprovable. I didn’t make the claim; you did.”

I did nothing of the sort, and gave you numerous examples of free market superiority:…………

Thank you for informing the educated populace of your ability to superficially read a masterpiece that was obviously intended for people with an intelligence quotient above 100. Obviously extractive institutions are a big reason for economic inferiority as argued by the authors. However, and if you would have finished/understood the book you would know this already, culture has an inherent effect on the institutions that are/were in place. Civil unrest that is dictated by the culture of that civilization can lead to inclusive economic institutions. While I cannot completely refute your point, I feel compelled to point out that your obvious political bias has blinded you from the possibility that Romney AND you could be correct. That being said, I apologize for my harsh words but your bigotry got me fired up. I have followed your writings for a few months and have been impressed which is why I was so angry over your political tomfoolery.

[…] thoughts on Romney. Acemoglu wrote back from vacation in Turkey, pointing me to an item on the Cheap Talk blog Monday that’s kind of similar to this one. (It recommends that Romney read Why Nations […]